Maybe you had a stroke of luck and won the lottery. Maybe you just inherited a trust fund or were awarded a large sum of money in a lawsuit. Maybe you are a college student who just signed with the NBA or NFL and will become an instant millionaire in the next few months.
No matter where your money comes from, it isn’t a guarantee for an easy life.
Lottery winners tend to file for bankruptcy at double the rate of the general population. A Sports Illustrated investigation found 78 percent of NFL players file for bankruptcy or experience financial difficulties within two years of retirement. According to a 2010 survey of more than 2,000 rich families by The Williams Group, a wealth management firm, seventy percent of families lost control of their assets in the first generation following wealth transfer.
Most people who receive a sudden windfall may feel the urge to spend big, invest, move, quit their job, or give to others. Large sums of money also give people an opportunity to indulge in all sorts of passions, hobbies, and ill-advised behaviors which can generate financial consequences later.
What do you do when you come into a large sum of money? If you want your windfall to last, don’t do anything, yet. Receiving a large amount can be exciting, stressful, and fearful. Once you have a chance to come to terms with the personal and financial consequences of your new-found fortune, you need to meet with a financial advisor and assemble a support team to look at your financial needs and goals.
It takes a team to handle big money. Large money means financial complexities – everything from gift taxes to income taxes, estate issues, and more. You need to get unbiased advice from a financial advisor who can help you put together a financial plan to account for your cash, manage it wisely, and use it to build wealth. You may also need to add an accountant, an attorney, and insurance professional to the team.
Regrettably, some people lose it all within a few years because they fail to plan. Taking the time to make well-thought-out financial decisions will help ensure your money will last. Letting the “newness” of the money wear off allows you to tackle financial planning with a clear head.
When big money comes your way, it’s easy to focus on one aspect of the money: how to spend it. Think about where you’ll keep it, instead. Experts say it’s best to separate it from all your other accounts – especially your checking account. Consider a special savings account or brokerage account.
Now, of course you want to enjoy the money, and you should, but do so within reasonable boundaries. The key is to focus on the top three to five items on your wish list. After, get serious about the long-term opportunities your windfall could provide.
Many people with new wealth have financial problems which need to be addressed immediately. It’s important you pay off debt, but be weary of becoming a human ATM machine for others.
As anyone who has come into sudden wealth can attest, the act of receiving a huge pile of money often leads to requests for financial gifts or “loans” from needy family members and friends – including some relatives you didn’t even know you had.
Because many of us have difficulty establishing financial boundaries, it can be emotionally taxing to deal with requests for money. It’s important to shy away from the constant stream of people requesting handouts, because your kindness can be exploited. You could wind up making unwise economic choices, which you may resent later. One way to avoid this problem is to have a trusted third-party serve as an intermediary to handle all requests for money. This person can be a close, responsible family member, or a neutral financial adviser who can offer you some perspective.
Winning money, inheriting assets, or reaping a big financial windfall can be a dream come true, but if the money is spent too quickly spent or mismanaged, it can become a nightmare.
For more information on Summit Brokerage Services, visit www.joinsummit.com or contact us at (800) 354-5528.
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